Could tiny Cyprus with a population of less than 1 million be the undoing of the Euro experiment? It seems surreal to think that such a tiny country, representing less than a quarter percent of Euro GDP could be the trigger for the unraveling of an entire continent’s currency but it is often small countries that reveal big problems. Thailand was the first domino to fall in the Asian crisis 16 years ago and Iceland was one of the first to go in 2008. I don’t know if we’ll look back on Cyprus as the tipping point but I have said for a long time that the Euro will not survive in its present form, if at all. The imbalances in the Euro economy can be solved while saving the Euro but only if someone is willing to foot the bill. At present, all of Europe is acting as if they forgot their wallet.

Cyprus is a microcosm of what is wrong with the global banking system. Essentially the Cyprus banking system was (and yes I think past tense is proper usage here) nothing more than a gambling operation. It sounds like a bad movie script: Cypriot banks borrow money from Russian mobsters and lend money to a bunch of Greeks. Then the Greeks abscond with the funds forcing the banks to go to Godfather Draghi for a bailout. When the Godfather threatens to cut off their funds, the banks are forced to tell the Russians they don’t have all their money. Any day now, I expect to read about Cypriot bankers waking up with horse heads as bedmates. And this isn’t something unique to Cyprus. It is global banking in a nutshell: borrow at cheap rates and use the funds to speculate in the market. The only difference between JP Morgan and the Cypriot banks is that Jamie Dimon was smart enough not to borrow from Russian gangsters and JP Morgan has better traders. Or at least we thought so until that whale beached itself in London.

I don’t know if Euroland will come up with a “solution” to the Cyprus banking situation by the ECB deadline tomorrow but it may not matter. I think we are fast approaching the point where most everyone loses whatever confidence they had in the big global banks. Cyprus is just a convenient scapegoat that laid bare the fiction of deposit insurance in Europe. Cyprus has no good options outside of stiffing the Russians or leaving the Euro and the latter may be the least painful. Certainly Icelanders – another small island that had a big banking problem – haven’t regretted stiffing their creditors, closing the banks and going back to fishing. Cypriots can go back to renting scooters to tourists or whatever it was they did before they decided to try to become the Cayman Islands of the Med.

If that happens I suspect it won’t be long before the Greeks go the same path and go back to stiffing creditors the old fashioned way – by devaluing the Drachma. I had thought that the Eurocrats would continue to hold things together for a while but if Draghi starts confiscating the ink supply down at the ECB all bets are off. In any event, the European economy is a mess getting messier by the day so even if they find a way to keep the Russians and Germans happy enough to bail out Cyprus, there are more problems facing the Europeans. In addition to the well known problems in Spain and Italy, France’s economy is in near free fall – while it would be satisfying to blame it on Hollande, it was going there no matter who occupied the Elysee – and the Dutch are rapidly running out of fingers to put in their economic dike (not that there’s anything wrong with that and get your mind out of the gutter). Oh and speaking of small countries with problems, bond yields are spiking in Slovenia (and you thought Cyprus was hard to find).

Meanwhile, in case you haven’t noticed with all the hoopla surrounding the US stock market, some key Asian markets are starting to roll over. Chinese stocks led the way but Hong Kong, Korea, Taiwan, Malaysia, Singapore and Thailand – uh oh – are all looking rather toppy and some of them are in full correction mode. Emerging markets in Latin America are faring no better with Brazil, Colombia and even Chile and Mexico also past their recent peaks. The list of markets still in undeniable uptrends is shrinking by the day and it seems unlikely that ours can continue setting records with the rest of the world in correction.

So far the US economy has weathered the global storm pretty well but with so many multinational companies in the S&P 500 that may not matter for the stock market. Oracle and FedEx both reported disappointing earnings last week and neither sounded very optimistic in their outlook. The tally of companies warning about less than expected earnings versus those raising guidance is running 4 to 1 for the pessimists at this point so this doesn’t appear to be confined to a few companies. For now, investors don’t seem to be focused on this quarter with expectations for the rest of the year still optimistic in the extreme. That may change as earnings start coming in and companies attempt to talk down those lofty expectations. The end of the quarter, in case you’ve forgotten, is a mere week away so the stock market is about to have its own version of March madness in the form of earnings season.

Ben Bernanke made it clear at his press conference last week that the QE beatings will continue until morale improves so that market crutch isn’t going anywhere anytime soon. Unfortunately, I don’t think Bernanke & Co. can print corporate earnings so there is a limit to how high they can kite this market. At this point, the old high on the S&P 500 is proving to be formidable resistance and it may be that it is a hurdle too high for monetary policy alone. Or maybe everyone will continue to ignore Europe, Asia, Latin America, corporate earnings and everything else that keeps me wary and stocks will keep marching higher. But risk is rising and the higher stocks go before everyone realizes it the harder the fall will be. As the Cypriot bankers have found out, gambling is fun when you’re on a winning streak but the house (market) always wins in the end.

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@4kb.d43.myftpupload.com or   786-249-3773.

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